Remuneration To Partners

Remuneration includes any salary, bonus, commission, or any other payment of such nature, whatever may be called, paid to the partners. 

The payment of remuneration is subject to section 40(b) and the remuneration clause of the partnership deed. 

Section 40(b) of the Income-tax act determines the maximum amount of remuneration allowed under the Income-tax Act, 1961. It provides the specific condition for the payment of remuneration to the partners. 

This article has explained the provisions related to the remuneration to partners, calculation of the book profits, and treatment of interest on capital. 

Conditions specified under section 40(b)

A firm/LLP is allowed to pay remuneration after fulfilling the following conditions:

1. It should be authorized by the partnership deed

Any working partner is eligible to receive any payment of remuneration, bonus, commission or salary only if such payment is authorized by the partnership deed. Partnership deed must have a clause containing the clear instructions:

• The amount of the remuneration to be paid, or
• The manner clarifying the computation of remuneration 

In case there is no provision in the partnership deed regarding the payment of remuneration, then the firm is not eligible to get the deduction.

2. It should be paid only to the working partner

A working partner is one who actively takes part in managing the business affairs in which he is a partner. Here, actively engaged means a partner devotes his working hours towards the firm. 

Therefore, any remuneration paid to the non-working (sleeping) partner is not allowed for deduction as per section 40(b). 

3. It should not be related to the prior to the partnership deed

The deduction of remuneration is permitted from the date specified in the partnership firm. Any prior payment before the partnership deed is not eligible for deduction. Hence, remuneration should not be retrospective. 

For instance, if a firm executes a partnership deed as of 1st September and such deed is effective from 1st April. In such a case, the deduction of the remuneration to the working partners shall be allowed from 1st September onwards (not from 1st April).

4. It should be within the prescribed limit 

The maximum amount of the salary, bonus, commission or remuneration to all the partners during the previous year shall be computed as follows:

5. It is not allowed under presumptive basis

If you have are availing the benefit of presumptive taxation under section 44AD or 44ADA, then remuneration to the partner is not allowed.

How to compute book profit for partner remuneration?

Calculation of book profit:

As the remuneration to the partners is allowed on a book profit basis, the calculation of book profit shall be as follows:

Partner in individual or representative capacity

 Payment of interest on partner capital

• Payment of interest is allowed to both working and non-working partner.
• It must be authorized by the partnership deed.
• No interest shall be allowed prior to the date of the partnership deed.
• The maximum rate of interest allowed as a deduction is 12% per annum simple interest. Any excess interest payment, i.e., more than 12% (even authorized in the partnership deed), shall be disallowed.

Taxation treatment of remuneration

• The employer shall deduct TDS on the payment of the salary or remuneration. However, no TDS shall be deducted on interest paid or credited to a partner.
• The amount of remuneration or interest allowed to the firm for deduction shall be taxable in the hands of the partner under the head profit from business and profession.
• On the other hand, if the amount is disallowed in the hands of the firm, then such amount shall also be exempt in the hands of the partner.